MIDTERM EXAMINATION IN SALES

PROBLEM NO. 1. Petitioner Heirs of Paulino Atienza, namely, Rufina L. Atienza, Anicia A. Ignacio, Roberto Atienza, Maura A. Domingo, Ambrocio Atienza, Maxima Atienza, Luisito Atienza, Celestina A. Gonzales, Regalado Atienza and Melita A. Dela Cruz (collectively, the Atienzas)^[1] own a 21,959 square meters of registered agricultural land at Valle Cruz, Cabanatuan City.^[2]  They acquired the land under an emancipation patent^[3] through the government's land reform program.^[4]

On August 12, 2002 the Atienzas and respondent Domingo P. Espidol entered into a contract called Kasunduan sa Pagbibili ng Lupa na may Paunang-Bayad (contract to sell land with a down payment) covering the property.^[5]  They agreed on a price of P130.00 per square meter or a total of P2,854,670.00, payable in three installments: P100,000.00 upon the signing of the contract; P1,750,000.00 in December 2002, and the remaining P974,670.00 in June 2003. Respondent Espidol paid the Atienzas P100,000.00 upon the execution of the contract and paid P30,000.00 in commission to the brokers.

When the Atienzas demanded payment of the second installment of P1,750,000.00 in December 2002, however, respondent Espidol could not pay it.  He offered to pay the Atienzas P500.000.00 in the meantime,^[6] which they did not accept.  Claiming that Espidol breached his obligation, on February 21, 2003 the Atienzas filed a complaint^[7] for the annulment of their agreement with damages before the Regional Trial Court (RTC) of Cabanatuan City in Civil Case 4451.

QUESTIONS: (1)  Can the Atienzas validly sell to respondent Espidol the subject land which they acquired through land reform under Presidential Decree 27 ?

2. Are the  Atienzas  entitled to the cancellation of the contract to sell they entered into with respondent Espidol on the ground of the latter's failure to pay the second installment when it fell due?

3. Is  Atienzas' action for cancellation of title premature absent the notarial notice of cancellation required by R.A. 6552? Explain your answer.

Nonetheless, in order to settle a matter that would apparently undermine a significant policy adopted under the land reform program, the Court cannot simply shirk from the issue. The Atienzas’ title shows on its face that the government granted title to them on January 9, 1990 by virtue of P.D. 27. This law explicitly prohibits any form of transfer of the land granted under it except to the government or by hereditary succession to the successors of the farmer beneficiary.

Upon the enactment of Executive Order 228¹⁷ in 1987, however, the restriction ceased to be absolute. Land reform beneficiaries were allowed to transfer ownership of their lands provided that their amortizations with the Land Bank of the Philippines (Land Bank) have been paid in full.¹⁸ In this case, the Atienzas’ title categorically states that they have fully complied with the requirements for the final grant of title under P.D. 27. This means that they have completed payment of their amortization with Land Bank. Consequently, they could already legally transfer their title to another.

Two. Regarding the right to cancel the contract for non-payment of an installment, there is need to initially determine if what the parties had was a contract of sale or a contract to sell. In a contract of sale, the title to the property passes to the buyer upon the delivery of the thing sold. In a contract to sell, on the other hand, the ownership is, by agreement, retained by the seller and is not to pass to the vendee until full payment of the purchase price. In the contract of sale, the buyer’s non-payment of the price is a negative resolutory condition; in the contract to sell, the buyer’s full payment of the price is a positive suspensive condition to the coming into effect of the agreement. In the first case, the seller has lost and cannot recover the ownership of the property unless he takes action to set aside the contract of sale. In the second case, the title simply remains in the seller if the buyer does not comply with the condition precedent of making payment at the time specified in the contract.¹⁹ Here, it is quite evident that the contract involved was one of a contract to sell since the Atienzas, as sellers, were to retain title of ownership to the land until respondent Espidol, the buyer, has paid the agreed price. Indeed, there seems no question that the parties understood this to be the case.²⁰

Admittedly, Espidol was unable to pay the second installment of P1,750,000.00 that fell due in December 2002.1awph!1 That payment, said both the RTC and the CA, was a positive suspensive condition failure of which was not regarded a breach in the sense that there can be no rescission of an obligation (to turn over title) that did not yet exist since the suspensive condition had not taken place. And this is correct so far. Unfortunately, the RTC and the CA concluded that should Espidol eventually pay the price of the land, though not on time, the Atienzas were bound to comply with their obligation to sell the same to him.

But this is error. In the first place, since Espidol failed to pay the installment on a day certain fixed in their agreement, the Atienzas can afterwards validly cancel and ignore the contract to sell because their obligation to sell under it did not arise. Since the suspensive condition did not arise, the parties stood as if the conditional obligation had never existed.²¹

Secondly, it was not a pure suspensive condition in the sense that the Atienzas made no undertaking while the installments were not yet due. Mr. Justice Edgardo L. Paras gave a fitting example of suspensive condition: "I’ll buy your land for P1,000.00 if you pass the last bar examinations." This he said was suspensive for the bar examinations results will be awaited. Meantime the buyer is placed under no immediate obligation to the person who took the examinations.²²

Here, however, although the Atienzas had no obligation as yet to turn over title pending the occurrence of the suspensive condition, it was implicit that they were under immediate obligation not to sell the land to another in the meantime. When Espidol failed to pay within the period provided in their agreement, the Atienzas were relieved of any obligation to hold the property in reserve for him.

The ruling of the RTC and the CA that, despite the default in payment, the Atienzas remained bound to this day to sell the property to Espidol once he is able to raise the money and pay is quite unjustified. The total price was P2,854,670.00. The Atienzas decided to sell the land because petitioner Paulino Atienza urgently needed money for the treatment of his daughter who was suffering from leukemia.²³ Espidol paid a measly P100,000.00 in down payment or about 3.5% of the total price, just about the minimum size of a broker’s commission. Espidol failed to pay the bulk of the price, P1,750,000.00, when it fell due four months later in December 2002. Thus, it was not such a small default as to justify the RTC and the CA’s decision to continue to tie up the Atienzas to the contract to sell upon the excuse that Espidol tried his honest best to pay.

Although the Atienzas filed their action with the RTC on February 21, 2003, four months before the last installment of P974,670.00 fell due in June 2003, it cannot be said that the action was premature. Given Espidol’s failure to pay the second installment of P1,750,000.00 in December 2002 when it was due, the Atienzas’ obligation to turn over ownership of the property to him may be regarded as no longer existing.²⁴ The Atienzas had the right to seek judicial declaration of such non-existent status of that contract to relieve themselves of any liability should they decide to sell the property to someone else. Parenthetically, Espidol never offered to settle the full amount of the price in June 2003, when the last installment fell due, or during the whole time the case was pending before the RTC.

Three. Notice of cancellation by notarial act need not be given before the contract between the Atienzas and respondent Espidol may be validly declare non-existent. R.A. 6552 which mandated the giving of such notice does not apply to this case. The cancellation envisioned in that law pertains to extrajudicial cancellation or one done outside of court,²⁵ which is not the mode availed of here. The Atienzas came to court to seek the declaration of its obligation under the contract to sell cancelled. Thus, the absence of that notice does not bar the filing of their action.

Since the contract has ceased to exist, equity would, of course, demand that, in the absence of stipulation, the amount paid by respondent Espidol be returned, the purpose for which it was given not having been attained;²⁶ and considering that the Atienzas have consistently expressed their desire to refund the P130,000.00 that Espidol paid.²⁷ (HEIRS OF PAULINO ATIENZA, namely, RUFINA L. ATIENZA, ANICIA A. IGNACIO, ROBERTO ATIENZA, MAURA A. DOMINGO, AMBROCIO ATIENZA, MAXIMA ATIENZA, LUISITO ATIENZA, CELESTINA A. GONZALES, REGALADO ATIENZA and MELITA A. DELA CRUZ Petitioners, vs.DOMINGO P. ESPIDOL, Respondent.)

PROBLEM NO. 2 What is a contract to sell? Distinguish it from a contract of sale.

PROBLEM NO. 3. The undisputed facts of this case show that on 11 June 1997, Elias Colarina bought on installment from Magna Financial Services Group, Inc., one (1) unit of Suzuki Multicab.

After making a down payment, Colarina executed a promissory note for the balance of P229,284.00 payable in thirty-six (36) equal monthly installments at P6,369.00 monthly, beginning 18 July 1997. To secure payment thereof, Colarina executed an integrated promissory note and deed of chattel mortgage over the motor vehicle.

Colarina failed to pay the monthly amortization beginning January 1999, accumulating an unpaid balance of P131,607.00. Despite repeated demands, he failed to make the necessary payment. On 31 October 2000 Magna Financial Services Group, Inc. filed a Complaint for Foreclosure of Chattel Mortgage with Replevin^[2] before the Municipal Trial Court in Cities (MTCC), Branch 2, Legaspi City, docketed as Civil Case No. 4822.^[3] Upon the filing of a Replevin Bond, a Writ of Replevin was issued by the MTCC. On 27 December 2000, summons, together with a copy of the Writ of Replevin, was served on Colarina who voluntarily surrendered physical possession of the vehicle to the Sheriff, Mr. Antonio Lozano. On 02 January 2001, the aforesaid motor vehicle was turned over by the sheriff to Magna Financial Services Group, Inc.^[4] On 12 July 2001, Colarina was declared in default for having filed his answer after more than six (6) months from the service of summons upon him. Thereupon, the trial court rendered judgment based on the facts alleged in the Complaint. In a decision dated 23 July 2001, it held:^[5]

WHEREFORE, judgment is hereby rendered in favor of plaintiff Magna Financial Services Group, Inc. and against the defendant Elias Colarina, ordering the latter:

a)	to pay plaintiff the principal sum of one hundred thirty one thousand six hundred seven (P131,607.00) pesos plus penalty charges at 4.5% per month computed from January, 1999 until fully paid;
(b)	to pay plaintiff P10,000.00 for attorney's fees; and
c)	to pay the costs.

`The foregoing money judgment shall be paid within ninety (90) days from the entry of judgment. In case of default in such payment, the one (1) unit of Suzuki Multicab, subject of the writ of replevin and chattel mortgage, shall be sold at public auction to satisfy the said judgment.^[6]

QUESTIONS: (1) In a contract of sale of personal property the price of which is payable in installment, what are the remedies available to the vendor?

(2) Based on the facts of the above case, is the Decision of the trial court correct?

WHAT IS THE TRUE NATURE OF A FORECLOSURE OF CHATTEL MORTGAGE, EXTRAJUDICIAL OR JUDICIAL, AS AN EXERCISE OF THE 3^RD OPTION UNDER ARTICLE 1484, PARAGRAPH 3 OF THE CIVIL CODE.

In its Memorandum, petitioner assails the decision of the Court of Appeals and asserts that a mortgage is only an accessory obligation, the principal one being the undertaking to pay the amounts scheduled in the promissory note. To secure the payment of the note, a chattel mortgage is constituted on the thing sold. It argues that an action for foreclosure of mortgage is actually in the nature of an action for sum of money instituted to enforce the payment of the promissory note, with execution of the security. In case of an extrajudicial foreclosure of chattel mortgage, the petition must state the amount due on the obligation and the sheriff, after the sale, shall apply the proceeds to the unpaid debt. This, according to petitioner, is the true nature of a foreclosure proceeding as provided under Rule 68, Section 2 of the Rules of Court.¹³

On the other hand, respondent countered that the Court of Appeals correctly set aside the trial court’s decision due to the inconsistency of the remedies or reliefs sought by the petitioner in its Complaint where it prayed for the custody of the chattel mortgage and at the same time asked for the payment of the unpaid balance on the motor vehicle.¹⁴

Article 1484 of the Civil Code explicitly provides:

ART. 1484. In a contract of sale of personal property the price of which is payable in installments, the vendor may exercise any of the following remedies:

(1) Exact fulfillment of the obligation, should the vendee fail to pay;

(2) Cancel the sale, should the vendee’s failure to pay cover two or more installments;

(3) Foreclose the chattel mortgage or the thing sold, if one has been constituted, should the vendee’s failure to pay cover two or more installments. In this case, he shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary shall be void.

Our Supreme Court in Bachrach Motor Co., Inc. v. Millan¹⁵ held: "Undoubtedly the principal object of the above amendment (referring to Act 4122 amending Art. 1454, Civil Code of 1889) was to remedy the abuses committed in connection with the foreclosure of chattel mortgages. This amendment prevents mortgagees from seizing the mortgaged property, buying it at foreclosure sale for a low price and then bringing the suit against the mortgagor for a deficiency judgment. The almost invariable result of this procedure was that the mortgagor found himself minus the property and still owing practically the full amount of his original indebtedness."

In its Complaint, Magna Financial Services Group, Inc. made the following prayer:

WHEREFORE, it is respectfully prayed that judgment render ordering defendant:

1. To pay the principal sum of P131,607.00 with penalty charges at 4.5% per month from January 1999 until paid plus liquidated damages.

2. Ordering defendant to reimburse the plaintiff for attorney’s fee at 25% of the amount due plus expenses of litigation at not less than P10,000.00.

3. Ordering defendant to surrender to the plaintiff the possession of the Multicab described in paragraph 2 of the complaint.

4. Plaintiff prays for other reliefs just and equitable in the premises.

It is further prayed that pendent lite, an Order of Replevin issue commanding the Provincial Sheriff at Legazpi City or any of his deputies to take such multicab into his custody and, after judgment, upon default in the payment of the amount adjudged due to the plaintiff, to sell said chattel at public auction in accordance with the chattel mortgage law.¹⁶

In its Memorandum before us, petitioner resolutely declared that it has opted for the remedy provided under Article 1484(3) of the Civil Code,¹⁷ that is, to foreclose the chattel mortgage.

It is, however, unmistakable from the Complaint that petitioner preferred to avail itself of the first and third remedies under Article 1484, at the same time suing for replevin. For this reason, the Court of Appeals justifiably set aside the decision of the RTC. Perusing the Complaint, the petitioner, under its prayer number 1, sought for the payment of the unpaid amortizations which is a remedy that is provided under Article 1484(1) of the Civil Code, allowing an unpaid vendee to exact fulfillment of the obligation. At the same time, petitioner prayed that Colarina be ordered to surrender possession of the vehicle so that it may ultimately be sold at public auction, which remedy is contained under Article 1484(3). Such a scheme is not only irregular but is a flagrant circumvention of the prohibition of the law. By praying for the foreclosure of the chattel, Magna Financial Services Group, Inc. renounced whatever claim it may have under the promissory note.¹⁸

Article 1484, paragraph 3, provides that if the vendor has availed himself of the right to foreclose the chattel mortgage, "he shall have no further action against the purchaser to recover any unpaid balance of the purchase price. Any agreement to the contrary shall be void." In other words, in all proceedings for the foreclosure of chattel mortgages executed on chattels which have been sold on the installment plan, the mortgagee is limited to the property included in the mortgage.¹⁹

Contrary to petitioner’s claim, a contract of chattel mortgage, which is the transaction involved in the present case, is in the nature of a conditional sale of personal property given as a security for the payment of a debt, or the performance of some other obligation specified therein, the condition being that the sale shall be void upon the seller paying to the purchaser a sum of money or doing some other act named.²⁰ If the condition is performed according to its terms, the mortgage and sale immediately become void, and the mortgagee is thereby divested of his title.²¹ On the other hand, in case of non payment, foreclosure is one of the remedies available to a mortgagee by which he subjects the mortgaged property to the satisfaction of the obligation to secure that for which the mortgage was given. Foreclosure may be effected either judicially or extrajudicially, that is, by ordinary action or by foreclosure under power of sale contained in the mortgage. It may be effected by the usual methods, including sale of goods at public auction.²² Extrajudicial foreclosure, as chosen by the petitioner, is attained by causing the mortgaged property to be seized by the sheriff, as agent of the mortgagee, and have it sold at public auction in the manner prescribed by Section 14 of Act No. 1508, or the Chattel Mortgage Law.²³ This rule governs extrajudicial foreclosure of chattel mortgage.

In sum, since the petitioner has undeniably elected a remedy of foreclosure under Article 1484(3) of the Civil Code, it is bound by its election and thus may not be allowed to change what it has opted for nor to ask for more. On this point, the Court of Appeals correctly set aside the trial court’s decision and instead rendered a judgment of foreclosure as prayed for by the petitioner.

The next issue of consequence is whether or not there has been an actual foreclosure of the subject vehicle.

In the case at bar, there is no dispute that the subject vehicle is already in the possession of the petitioner, Magna Financial Services Group, Inc. However, actual foreclosure has not been pursued, commenced or concluded by it.

Where the mortgagee elects a remedy of foreclosure, the law requires the actual foreclosure of the mortgaged chattel. Thus, in Manila Motor Co. v. Fernandez,²⁴ our Supreme Court said that it is actual sale of the mortgaged chattel in accordance with Sec. 14 of Act No. 1508 that would bar the creditor (who chooses to foreclose) from recovering any unpaid balance.²⁵ And it is deemed that there has been foreclosure of the mortgage when all the proceedings of the foreclosure, including the sale of the property at public auction, have been accomplished.²⁶

That there should be actual foreclosure of the mortgaged vehicle was reiterated in the case of De la Cruz v. Asian Consumer and Industrial Finance Corporation:²⁷

It is thus clear that while ASIAN eventually succeeded in taking possession of the mortgaged vehicle, it did not pursue the foreclosure of the mortgage as shown by the fact that no auction sale of the vehicle was ever conducted. As we ruled in Filinvest Credit Corp. v. Phil. Acetylene Co., Inc. (G.R. No. 50449, 30 January 1982, 111 SCRA 421) –

Under the law, the delivery of possession of the mortgaged property to the mortgagee, the herein appellee, can only operate to extinguish appellant’s liability if the appellee had actually caused the foreclosure sale of the mortgaged property when it recovered possession thereof (Northern Motors, Inc. v. Sapinoso, 33 SCRA 356 [1970]; Universal Motors Corp. v. Dy Hian Tat, 28 SCRA 161 [1969]; Manila Motors Co., Inc. v. Fernandez, 99 Phil. 782 [1956]).

Be that as it may, although no actual foreclosure as contemplated under the law has taken place in this case, since the vehicle is already in the possession of Magna Financial Services Group, Inc. and it has persistently and consistently avowed that it elects the remedy of foreclosure, the Court of Appeals, thus, ruled correctly in directing the foreclosure of the said vehicle without more. MAGNA FINANCIAL SERVICES GROUP, INC., Petitioner, vs.ELIAS COLARINA, Respondent.

PROBLEM NO. 4. Desiring to have safe drinking water at home, herein petitioner Villostas and her husband decided to buy a water purifier. At about this time, private respondent's Electrolux sales agents were making door to door selling of its products in the subdivision where petitioner has her residence. Because private respondent's sales agents had assured petitioner of the very special features of their brand of water purifier, petitioner Villostas placed an order for one (1) unit of said water purifier. On September 13, 1986, an Electrolux Aqua Guard water purifier was delivered and installed at petitioner's residence (Rollo, p. 38; 49). Consequently, petitioner signed the Sales Order (Annex "B", p. 31) and the Contract of Sale with Reservation of Title (Annex "A", p. 31) in October 1986 (Rollo, p. 38, 22). A warranty certificate, Exhibit "l", was issued by private respondent which provides that:

ELECTROLUX MARKETING, INCORPORATED WARRANTS THIS QUALITY ELECTROLUX PRODUCT TO PERFORM EFFICIENTLY FOR ONE FULL YEAR FROM DATE OF ORIGINAL PURCHASE. (Rollo, p. 49)

The purchase of said unit was on installment basis under which petitioner would pay the amount of P16,190.00 in 20 monthly installments of P635.00 a month.

After two (2) weeks, petitioner verbally complained for the first time about the impurities, dirtiness and bad odor coming out of the unit (Rollo, p. 22). On October 21, 1986, private respondent Electrolux sent its service technician to examine and test the water purifier. The water which came out was dirty so the unit was shut off automatically (Ibid.).The technician changed the filter of the unit on said date without charge with an instruction that the filter should be changed every 6 months otherwise the unit will not last long as the water in the area was dirty (Ibid.).

After the filter was replaced, petitioner paid the amount of Pl,650.00 on November 18, 1986 which included the first amortization of P700.00 (Ibid.).

Petitioner complained for the second and third time when dirty water still came out of the water purifier after the replacement of the filter. It was on the third complaint of petitioner Villostas when the service technician gave advise that the filter should be changed every six (6) months costing about P300.00 which was considered to be uneconomical by the former (Rollo, pp. 22-23).

On December 9, 1986, petitioner sent a letter to the private respondent's branch manager stating therein her complaint that the actual performance of the carbon filter was only for a month instead of the private respondent's claim that the replacement of such filter will be only once every six (6) months. The petitioner, citing the above incident as uneconomical, decided to return the unit and demand a refund for the amount paid (Rollo, p. 76), Electrolux's branch manager offered to change the water purifier with another brand of any of its appliance of the unit in her favor. Petitioner did not accept it as she was disappointed with the original unit which did not perform as warranted. Consequently, petitioner did not pay any more the subsequent installments in the amount of P14,540.00 exclusive of interests (Rollo, p. 23, 120).

What transpired next was an exchange of demand letter and reply between petitioner and private respondent.

Ultimately, respondent Electrolux Marketing, Inc. filed a complaint against petitioner Villostas with the MTC of Makati for the recovery of the sum of P14,540.00 representing the unpaid balance of the purchase price of one (1) Electrolux Water Purifier plus interest thereon at the rate of 42% per annum in accordance with the Sales Contract with Reservation of Title (Rollo, pp. 28-30).

In her amended answer, petitioner Villostas asserted that by reason of private respondent's breach of warranty she was availing of the remedy of rescission of the contract of sale and offered to return the water purifier to the seller as in fact, it was already being offered for return as early as December 9, 1986, aside from claiming for the refund of her payments. Petitioner prayed that the contract of sale be declared rescinded and the payments refunded to her together with the full grant of the claims asserted in her counterclaims (Rollo, pp. 35-36).

After trial on the merits. the MTC of Makati rendered its decision, the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered ordering the defendant to pay plaintiff as follows:

1) the amount of P14,540.00 representing the unpaid outstanding balance of the aforesaid unit, plus interest thereon at the rate of P42% per annum until fully paid;

QUESTIONS: (1) Is petitioner entitled to rescind the contract in violation of the warranty for hidden defect? (2) Is Petitioner bound to pay respondent the remaining balance of P14,540 plus interest thereon pursuant to the contract of sale? Explain your answer.

The main issue in the instant case is whether or not the petitioner is entitled to rescind the contract on the basis of a violation of the warranty of the article delivered by the respondent.

Petitioner contends that the Regional Trial Court erred when it ruled that its claim for rescission had prescribed inasmuch as she had formally notified the seller within a reasonable time, that is, 2 months and 26 days, from the delivery of water purifier on September 13, 1986 of her election to rescind.

Private respondent counters that the petitioner is not entitled to rescission vis-a-vis alleged violation of the warranty for hidden defects for the reason that rescission of contract sought by petitioner was beyond the jurisdictional competence of the trial court. It adds that petitioner could no longer avail of rescission because said legal recourse was time barred judging from delivery of the water purifier on September 13, 1986 pursuant to Art. 1571 of the New Civil Code.

The petition is impressed with merit.

Anent the jurisdictional competence of the Metropolitan Trial Court to order rescission of contract, suffice it to say that the action was initiated by herein private respondent Electrolux when it filed a complaint for collection of a sum of money worth P14,540.00, against petitioner Villostas. Said amount is indubitably within the jurisdiction of the Metropolitan Trial Court since it does not exceed P20,000.00 exclusive of interest and costs but inclusive of damages of whatever (Maceda v. CA, G.R. No. 83545, 176 SCRA 440 [1989]). Moreover, the jurisdiction of the court over the subject matter is determined by the allegations of the complaint irrespective of whether or not the plaintiff is entitled to recover upon all or some of the claims asserted therein (Caparros v. CA, G.R. No. 56803, 170 SCRA 758 [1989]). When the petitioner, therefore, raised rescission of contract in her answer, the court is not divested of its jurisdiction over the case on account of defenses raised by the answer. The court is then merely authorized to receive evidence thereon (Dela Cruz v. Bautista, G.R. No. 39692, 186 SCRA 517, [1990]). Clearly, the jurisdiction of the court cannot be made to depend upon the defenses set up in the answer or upon the motion to dismiss. Otherwise, the question of jurisdiction would depend almost entirely upon the defendant (Caparros v. CA, supra.).

As regards the contention that the action for rescission is barred by prescription under Art. 1571 of the Civil Code, the same is bereft of merit. It must be pointed out that at the time the Electrolux Aqua Guard water purifier was delivered and installed at petitioner Villostas' residence a Warranty Certificate was issued by private respondent Electrolux which reads:

ELECTROLUX MARKETING, INCORPORATED WARRANTS THIS QUALITY ELECTROLUX PRODUCT TO PERFORM EFFICIENTLY FOR ONE FULL YEAR FROM DATE OF ORIGINAL PURCHASE.

The foregoing is clearly an express warranty regarding the efficiency of the water purifier. On this regard the court said that while it is true that Article 1571 of the Civil Code provides for a prescriptive period of six months for a redhibitory action, a cursory reading of the ten preceding articles to which it refers will reveal that said rule may be applied only in case of implied warranties. The present case involves one with an express warranty. Consequently, the general rule on rescission of contract, which is four years (Article 1389, Civil Coded) shall apply (Moles v. IAC, G.R. No. 73913, 169 SCRA 777 [1989]). Inasmuch as the instant case involves an express warranty, the filing of petitioner's amended answer on September 30, 1988 is well within the four-year prescriptive period for rescission of contract from September 13, 1986, which was the delivery date of the unit. (NATIVIDAD VILLOSTAS, petitioner,vs.THE HON. COURT OF APPEALS, SECOND DIVISION, THE HON. SALVADOR S. TENSUAN as Presiding Judge of RTC, Makati, Branch 146 and ELECTROLUX MARKETING, INCORPORATED, respondent)

 PROBLEM NO. 5.What is a contract for a piece of work? Distinguish is from a contract of sale.

PROBLEM NO. 6 On November 27, 1997, petitioner purchased from respondent a brand new white Toyota Hi-Lux 2.4 SS double cab motor vehicle, 1996 model, in the amount of P508,000. Petitioner made a down payment of P152,400, leaving a balance of P355,600 which was payable in 36 months with 54% interest. The vehicle was delivered to petitioner two days later. On October 18, 1998, petitioner demanded the replacement of the engine of the vehicle because it developed a crack after traversing Marcos Highway during a heavy rain. Petitioner asserted that respondent should replace the engine with a new one based on an implied warranty. Respondent countered that the alleged damage on the engine was not covered by a warranty.

On April 20, 1999, petitioner filed a complaint for damages ² against respondent with the RTC. Respondent moved to dismiss the case on the ground that under Article 1571 of the Civil Code, the petitioner’s cause of action had prescribed as the case was filed more than six months from the date the vehicle was sold and/or delivered.

QUESTIONS: (1) Is contention of respondent that the action has already prescribed correct?

(2) What is the prescriptive period for (a) an implied warranty (b) for an express warranty?

(3) Distinguish an express warrant from an implied warranty.

(4) Is there an express warranty in the above-stated facts? Explain your answer.

Petitioner contends that the dismissal on the ground of prescription was erroneous because the applicable provision is Article 169 of Republic Act No. 7394 (otherwise known as "The Consumer Act of the Philippines" which was approved on April 13, 1992), and not Article 1571 of the Civil Code. Petitioner specifies that in his complaint, he neither asked for a rescission of the contract of sale nor did he pray for a proportionate reduction of the purchase price. What petitioner claims is the enforcement of the contract, that is, that respondent should replace either the vehicle or its engine with a new one. In this regard, petitioner cites Article 169 of Republic Act No. 7394 as the applicable provision, so as to make his suit come within the purview of the two-year prescriptive period. Tangentially, petitioner also justifies that his cause of action has not yet prescribed because this present suit, which was an action based on quasi-delict, prescribes in four years.

On the other hand, respondent maintains that petitioner’s cause of action was already barred by the statute of limitations under Article 1571 of the Civil Code for having been filed more than six months from the time the vehicle was purchased and/or delivered. Respondent reiterates that Article 169 of Republic Act No. 7394 does not apply.

Petitioner’s argument is erroneous. Article 1495 of the Civil Code states that in a contract of sale, the vendor is bound to transfer the ownership of and to deliver the thing that is the object of sale. Corollarily, the pertinent provisions of the Code set forth the available remedies of a buyer against the seller on the basis of a warranty against hidden defects:

Art. 1561. The vendor shall be responsible for warranty against the hidden defects which the thing sold may have, should they render it unfit for the use for which it is intended, or should they diminish its fitness for such use to such an extent that, had the vendee been aware thereof, he would not have acquired it or would have given a lower price for it; but said vendor shall not be answerable for patent defects or those which may be visible, or for those which are not visible if the vendee is an expert who, by reason of this trade or profession, should have known them. (Emphasis supplied)

Art. 1566. The vendor is responsible to the vendee for any hidden faults or defects in the thing sold, even though he was not aware thereof.

This provision shall not apply if the contrary has been stipulated and the vendor was not aware of the hidden faults or defects in the thing sold.

Art. 1571. Actions arising from the provisions of the preceding ten articles shall be barred after six months from the delivery of the thing sold.

(Emphasis supplied)

Under Article 1599 of the Civil Code, once an express warranty is breached, the buyer can accept or keep the goods and maintain an action against the seller for damages. In the absence of an existing express warranty on the part of the respondent, as in this case, the allegations in petitioner’s complaint for damages were clearly anchored on the enforcement of an implied warranty against hidden defects, i.e., that the engine of the vehicle which respondent had sold to him was not defective. By filing this case, petitioner wants to hold respondent responsible for breach of implied warranty for having sold a vehicle with defective engine. Such being the case, petitioner should have exercised this right within six months from the delivery of the thing sold.⁷ Since petitioner filed the complaint on April 20, 1999, or more than nineteen months counted from November 29, 1997 (the date of the delivery of the motor vehicle), his cause of action had become time-barred.

Petitioner contends that the subject motor vehicle comes within the context of Republic Act No. 7394. Thus, petitioner relies on Article 68 (f) (2) in relation to Article 169 of Republic Act No. 7394. Article 4 (q) of the said law defines "consumer products and services" as goods, services and credits, debts or obligations which are primarily for personal, family, household or agricultural purposes, which shall include, but not limited to, food, drugs, cosmetics, and devices. The following provisions of Republic Act No. 7394 state:

Art. 67. Applicable Law on Warranties. — The provisions of the Civil Code on conditions and warranties shall govern all contracts of sale with conditions and warranties.

Art. 68. Additional Provisions on Warranties. — In addition to the Civil Code provisions on sale with warranties, the following provisions shall govern the sale of consumer products with warranty:

e) Duration of warranty. The seller and the consumer may stipulate the period within which the express warranty shall be enforceable. If the implied warranty on merchantability accompanies an express warranty, both will be of equal duration.1âwphi1

Any other implied warranty shall endure not less than sixty (60) days nor more than one (1) year following the sale of new consumer products.

f) Breach of warranties — xxx

x x x

2) In case of breach of implied warranty, the consumer may retain in the goods and recover damages, or reject the goods, cancel the contract and recover from the seller so much of the purchase price as has been paid, including damages. (Emphasis supplied.)

Consequently, even if the complaint is made to fall under the Republic Act No. 7394, the same should still be dismissed since the prescriptive period for implied warranty thereunder, which is one year, had likewise lapsed.

WHEREFORE, the petition is DENIED for being in violation of the hierarchy of courts, and in any event, for lack of merit. G.R. No. 141480             November 29, 2006CARLOS B. DE GUZMAN, Petitioner, vs.TOYOTA CUBAO, INC., Respondent.

PROBLEM NO. 7 On 7 May 1990, Lydia L. Geronimo, the herein private respondent, filed a complaint for damages against petitioner with the Regional Trial Court (RTC) of Dagupan City. ¹ The case was docketed as Civil Case No. D-9629. She alleges in her complaint that she was the proprietress of Kindergarten Wonderland Canteen docketed as located in Dagupan City, an enterprise engaged in the sale of soft drinks (including Coke and Sprite) and other goods to the students of Kindergarten Wonderland and to the public; on or about 12 August 1989, some parents of the students complained to her that the Coke and Sprite soft drinks sold by her contained fiber-like matter and other foreign substances or particles; he then went over her stock of softdrinks and discovered the presence of some fiber-like substances in the contents of some unopened Coke bottles and a plastic matter in the contents of an unopened Sprite bottle; she brought the said bottles to the Regional Health Office of the Department of Health at San Fernando, La Union, for examination; subsequently, she received a letter from the Department of Health informing her that the samples she submitted "are adulterated;" as a consequence of the discovery of the foreign substances in the beverages, her sales of soft drinks severely plummeted from the usual 10 cases per day to as low as 2 to 3 cases per day resulting in losses of from P200.00 to P300.00 per day, and not long after that she had to lose shop on 12 December 1989; she became jobless and destitute; she demanded from the petitioner the payment of damages but was rebuffed by it. She prayed for judgment ordering the petitioner to pay her P5,000.00 as actual damages, P72,000.00 as compensatory damages, P500,000.00 as moral damages, P10,000.00 as exemplary damages, the amount equal to 30% of the damages awarded as attorney's fees, and the costs. ²

The petitioner moved to dismiss ³ the complaint on the grounds of failure to exhaust administrative remedies and prescription. Anent the latter ground, the petitioner argued that since the complaint is for breach of warranty under Article 1561 of the said Code. In her Comment ⁴ thereto, private respondent alleged that the complaint is one for damages which does not involve an administrative action and that her cause of action is based on an injury to plaintiff's right which can be brought within four years pursuant to Article 1146 of the Civil Code; hence, the complaint was seasonably filed.

Questions (a) Is petitioner correct in his allegation that the action for a breach of warranty had already prescribed?

(b) In your analysis, what is really the basis of the action filed by Lydia Geronimo?

(c) If you were the judge will you dismiss the case? Explain your answers.

The petitioner insists that a cursory reading of the complaint will reveal that the primary legal basis for private respondent's cause of action is not Article 2176 of the Civil Code on quasi-delict — for the complaint does not ascribe any tortious or wrongful conduct on its part — but Articles 1561 and 1562 thereof on breach of a seller's implied warranties under the law on sales. It contends the existence of a contractual relation between the parties (arising from the contract of sale) bars the application of the law on quasi-delicts and that since private respondent's cause of action arose from the breach of implied warranties, the complaint should have been filed within six months room delivery of the soft drinks pursuant to Article 171 of the Civil Code.

In her Comment the private respondent argues that in case of breach of the seller's implied warranties, the vendee may, under Article 1567 of the Civil Code, elect between withdrawing from the contract or demanding a proportionate reduction of the price, with damages in either case. She asserts that Civil Case No. D-9629 is neither an action for rescission nor for proportionate reduction of the price, but for damages arising from a quasi-delict and that the public respondent was correct in ruling that the existence of a contract did not preclude the action for quasi-delict. As to the issue of prescription, the private respondent insists that since her cause of action is based on quasi-delict, the prescriptive period therefore is four (4) years in accordance with Article 1144 of the Civil Code and thus the filing of the complaint was well within the said period.

We find no merit in the petition. The public respondent's conclusion that the cause of action in Civil Case No. D-9629 is found on quasi-delict and that, therefore, pursuant to Article 1146 of the Civil Code, it prescribes in four (4) years is supported by the allegations in the complaint, more particularly paragraph 12 thereof, which makes reference to the reckless and negligent manufacture of "adulterated food items intended to be sold for public consumption."

The vendee's remedies against a vendor with respect to the warranties against hidden defects of or encumbrances upon the thing sold are not limited to those prescribed in Article 1567 of the Civil Code which provides:

Art. 1567. In the case of Articles 1561, 1562, 1564, 1565 and 1566, the vendee may elect between withdrawing from the contract and demanding a proportionate reduction of the price, with damages either
case. ¹³

The vendee may also ask for the annulment of the contract upon proof of error or fraud, in which case the ordinary rule on obligations shall be applicable. ¹⁴ Under the law on obligations, responsibility arising from fraud is demandable in all obligations and any waiver of an action for future fraud is void. Responsibility arising from negligence is also demandable in any obligation, but such liability may be regulated by the courts, according to the circumstances. ¹⁵ Those guilty of fraud, negligence, or delay in the performance of their obligations and those who in any manner contravene the tenor thereof are liable for damages. ¹⁶

The vendor could likewise be liable for quasi-delict under Article 2176 of the Civil Code, and an action based thereon may be brought by the vendee. While it may be true that the pre-existing contract between the parties may, as a general rule, bar the applicability of the law on quasi-delict, the liability may itself be deemed to arise from quasi-delict, i.e., the acts which breaks the contract may also be a quasi-delict. Thus, in Singson vs. Bank of the Philippine Islands, ¹⁷ this Court stated:

We have repeatedly held, however, that the existence of a contract between the parties does not bar the commission of a tort by the one against the other and the consequent recovery of damages therefor. ¹⁸ Indeed, this view has been, in effect, reiterated in a comparatively recent case. Thus, in Air France vs. Carrascoso, ¹⁹ involving an airplane passenger who, despite hi first-class ticket, had been illegally ousted from his first-class accommodation and compelled to take a seat in the tourist compartment, was held entitled to recover damages from the air-carrier, upon the ground of tort on the latter's part, for, although the relation between the passenger and a carrier is "contractual both in origin and nature . . . the act that breaks the contract may also be a tort.

Otherwise put, liability for quasi-delict may still exist despite the presence of contractual relations. ²⁰

Under American law, the liabilities of a manufacturer or seller of injury-causing products may be based on negligence, ²¹ breach of warranty, ²² tort, ²³ or other grounds such as fraud, deceit, or misrepresentation. ²⁴ Quasi-delict, as defined in Article 2176 of the Civil Code, (which is known in Spanish legal treaties as culpa aquiliana, culpa extra-contractual or cuasi-delitos) ²⁵ is homologous but not identical to tort under the common law, ²⁶ which includes not only negligence, but also intentional criminal acts, such as assault and battery, false imprisonment and deceit. ²⁷

It must be made clear that our affirmance of the decision of the public respondent should by no means be understood as suggesting that the private respondent's claims for moral damages have sufficient factual and legal basis.

IN VIEW OF ALL THE FOREGOING, the instant petition is hereby DENIED for lack of merit, with costs against the petitioner. G.R. No. 110295 October 18, 1993COCA-COLA BOTTLERS PHILIPPINES, INC., vs.THE HONORABLE COURT OF APPEALS (Fifth Division) and MS. LYDIA GERONIMO, respondents.

PROBLEM NO. 8. Spouses Pablo and Escolastica Mabanta were the registered owners of two lots located in Patul and Capaltitan, Santiago, Isabela, with an area of 512 and 15,000 square meters, covered by Transfer Certificates of Title (TCT) Nos. 72705 and 72707, respectively. On October 25, 1975, they mortgaged both lots with the Development Bank of the Philippines (DBP) as collateral for a loan of P14,000.00.³

Five years thereafter or on September 1, 1980, spouses Mabanta sold the lots to Susana Soriano by way of a "Deed of Sale of Parcels of Land With Assumption of Mortgage."⁴ Included in the Deed is an agreement that they could repurchase the lots within a period of two (2) years.

Spouses Mabanta failed to repurchase the lots. But sometime in 1984, they were able to convince Alejandro Gabriel to purchase the lots from Susana Soriano. As consideration, Alejandro delivered to Susana a 500-square meter residential lot with an actual value of P40,000.00 and paid spouses Mabanta the sum of P5,000.00. On May 15, 1984, spouses Mabanta executed a "Deed of Sale with Assumption of Mortgage"⁵ in favor of Alejandro. For her part, Susana executed a document entitled "Cancellation of Contract"⁶ whereby she transferred to Alejandro all her rights over the two lots.

Alejandro and his son Alfredo cultivated the lots. They also caused the restructuring of spouses Mabanta’s loan with the DBP.⁷ However, when they were ready to pay the entire loan, they found that spouses Benito and Pura Tan had paid it and that the mortgage was already cancelled.⁸

On August 18, 1985, Benito Tan and Alejandro Tridanio, a barangay official, approached Alejandro to refund to him the P5,000.00 he paid to spouses Mabanta. Alejandro refused because Tan was unwilling to return the former’s 500-square meter lot delivered to Susana as purchase price for the lots. Thereafter, spouses Tan tried to eject Alejandro from the lot covered by TCT No. 72707.

On September 17, 1985, Alejandro and Alfredo filed with the Regional Trial Court, Branch 21, Santiago, Isabela a complaint (involving the lot covered by TCT No. 72707) for specific performance, reconveyance and damages with an application for a preliminary injunction against spouses Mabanta, spouses Tan, the DBP and barangay officials Dominador Maylem and Alejandro Tridanio. In due time, these defendants filed their respective answers.

During the proceedings, it turned out that it was spouses Tan’s daughter, Zenaida Tan-Reyes who bought one of the lots (covered by TCT No. 72707) from spouses Mabanta on August 21, 1985. Not having been impleaded as a party-defendant, she filed an answer-in-intervention alleging that she is the registered owner of the lot covered by TCT No. 72707; that she purchased it from spouses Mabanta "in good faith and for value"; that she paid their loan with the DBP in the amounts of P17,580.88 and P16,845.17 per Official Receipts Nos. 1749539 and 1749540, respectively; that the mortgage with the DBP was cancelled and spouses Mabanta executed a "Deed of Absolute Sale"⁹ in her favor; and that TCT No. T-72707 was cancelled and in lieu thereof, TCT No. T-160391 was issued in her name.

On April 12, 1991, the trial court rendered its Decision sustaining the right of Alejandro and Alfredo Gabriel over the lot covered by TCT No. 72707 (now TCT No. T-160391), thus:

"WHEREFORE, in the light of the foregoing considerations judgment is hereby rendered:

1. DECLARING Exhibit "A", the deed of sale with assumption of mortgage executed by the spouses Pablo Mabanta and Escolastica Colobong (in favor of Alejandro and Alfredo Gabriel) valid and subsisting.

2. ORDERING the plaintiff Alejandro Gabriel to pay to the spouses Pablo Mabanta and Escolastica Colobong the sums of P5,000.00 plus P34,426.05 (representing the loan with the DBP which plaintiff assumed) within 30 days from receipt hereof.

3. DECLARING the deed of sale executed by the spouses Pablo Mabanta and Escolastica Colobong in favor of Zenaida Tan Reyes as null and void.

4. ORDERING the intervenor Zenaida Tan-Reyes to reconvey the land covered by T.C.T. No. T-160391 in favor of Alejandro Gabriel.

QUESTION: Peruse carefully the decision of the Court and rule whether it is correct or not.

Court is wrong.

The issue for our resolution is whether or not respondent Zenaida Tan-Reyes acted in good faith when she purchased the subject lot and had the sale registered.

Settled is the principle that this Court is not a trier of facts. In the exercise of its power of review, the findings of fact of the Court of Appeals are conclusive and binding and consequently, it is not our function to analyze or weigh evidence all over again.¹¹ This rule, however, is not an iron-clad rule.¹² In Floro vs. Llenado,¹³ we enumerated the various exceptions and one which finds application to the present case is when the findings of the Court of Appeals are contrary to those of the trial court.

We start first with the applicable law.

Article 1544 of the Civil Code provides:

"ART. 1544. If the same thing should have been sold to different vendees, the ownership shall be transferred to the person who may have first possession thereof in good faith, if it should be movable property.

"Should it be immovable property, the ownership shall belong to the person acquiring it who in good faith first recorded it in the Registry of Property.

"Should there be no inscription, the ownership shall pertain to the person who in good faith was first in possession; and, in the absence thereof; to the person who presents the oldest title, provided there is good faith."

Otherwise stated, where it is an immovable property that is the subject of a double sale, ownership shall be transferred (1) to the person acquiring it who in good faith first recorded it in the Registry of Property; (2) in default thereof, to the person who in good faith was first in possession; and (3) in default thereof, to the person who presents the oldest title, provided there is good faith.¹⁴ The requirement of the law then is two-fold: acquisition in good faith and registration in good faith.¹⁵ The rationale behind this is well-expounded in Uraca vs. Court of Appeals,¹⁶ where this Court held:

"Under the foregoing, the prior registration of the disputed property by the second buyer does not by itself confer ownership or a better right over the property. Article 1544 requires that such registration must be coupled with good faith. Jurisprudence teaches us that "(t)he governing principle is primus tempore, potior jure (first in time, stronger in right). Knowledge gained by the first buyer of the second sale cannot defeat the first buyer’s right except where the second buyer registers in good faith the second sale ahead of the first, as provided by the Civil Code. Such knowledge of the first buyer does not bar her from availing of her rights under the law, among them, to register first her purchase as against the second buyer. But in converso, knowledge gained by the second buyer of the first sale defeats his right even if he is first to register the second sale, since such knowledge taints his prior registration with bad faith. This is the price exacted by Article 1544 of the Civil Code for the second buyer being able to displace the first buyer, that before the second buyer can obtain priority over the first, he must show that he acted in good faith throughout (i.e. in ignorance of the first sale and of the first buyer’s right) – from the time of acquisition until the title is transferred to him by registration or failing registration, by delivery of possession." (Emphasis supplied)

In the case at bar, certain pieces of evidence, put together, would prove that respondent Reyes is not a buyer in good faith. The records show that on August 18, 1985, spouses Mabanta offered to her for sale the disputed lot. They told her it was mortgaged with respondent DBP and that she had to pay the loan if she wanted to buy it.¹⁷ She readily agreed to such a condition. The following day, her father Benito Tan, accompanied by barangay official Tridanio, went to petitioner Alejandro’s house offering to return to him the P5,000.00 he had paid to spouses Mabanta. Tan did not suggest to return the 500-square meter lot petitioner delivered to Susana Soriano.¹⁸ For this reason, petitioner refused Tan’s offer and even prohibited him from going to respondent DBP. We quote the following testimony of petitioner who, despite his blindness as shown by the records, testified to assert his right, thus:

"ATTY. CHANGALE:

Q         What can you say to that statement?

A         That is their mistake, sir.

Q         Why do you say that is their mistake?

A         Because her husband and Tridanio went at home offering to return the money but I did not accept, sir.

Q         Who is this Benito Tan you are referring to?

A         The husband of Pura Masa, sir.

Q         What is the relationship with the intervenor Zenaida Tan?

A         The daughter, sir.

Q         When did Benito Tan together with Councilman Tridanio came?

A         Before they went to the Development Bank of the Philippines they came at home and I prohibit them, sir.

Q         How did you prohibit them?

A         No, I said please I am just waiting for the Bank to inspect then I will pay my obligation.

x x x           x x x           x x x

Q         You stated earlier that you will just pay the payments. What are those payments you are referring to?

A         The payment I have given to Colobong and to the Bank, sir. They do not want to return the payment I have given to Susana Soriano and that is the beginning of our quarrel."¹⁹

We are thus convinced that respondent Reyes had knowledge that petitioner previously bought the disputed lot from respondent spouses Mabanta. Why should her father approach petitioner and offer to return to him the money he paid spouses Mabanta? Obviously, aware of the previous sale to petitioner, respondent Reyes informed her father about it. At this juncture, it is reasonable to conclude that what prompted him to go to petitioner’s house was his desire to facilitate his daughter’s acquisition of the lot, i.e., to prevent petitioner Alejandro from contesting it. He did not foresee then that petitioner would insist he has a prior right over the lot.

Now respondent Reyes claims that she is a purchaser in good faith. This is preposterous. Good faith is something internal. Actually, it is a question of intention. In ascertaining one’s intention, this Court must rely on the evidence of one’s conduct and outward acts. From her actuations as specified above, respondent Reyes cannot be considered to be in good faith when she bought the lot.

Moreover, it bears noting that on September 16, 1985, both petitioners filed with the trial court their complaint involving the lot in question against respondents. After a month, or on October 17, 1985, respondent Reyes had the "Deed of Absolute Sale" registered with the Registry of Property. Evidently, she wanted to be the first one to effect its registration to the prejudice of petitioners who, although in possession, have not registered the same. This is another indicum of bad faith.

We have consistently held that "in cases of double sale of immovables, what finds relevance and materiality is not whether or not the second buyer was a buyer in good faith but whether or not said second buyer registers such second sale in good faith, that is, without knowledge of any defect in the title of the property sold."²⁰ In Salvoro vs. Tanega,²¹ we had the occasion to rule that:

"If a vendee in a double sale registers the sale after he has acquired knowledge that there was a previous sale of the same property to a third party or that another person claims said property in a previous sale, the registration will constitute a registration in bad faith and will not confer upon him any right."

Mere registration of title is not enough, good faith must concur with the registration. To be entitled to priority, the second purchaser must not only establish prior recording of his deed, but must have acted in good faith, without knowledge of the existence of another alienation by the vendor to the other.²² In the old case of Leung Yee vs. F. L. Strong Machinery, Co. and Williamson, this Court ruled:

"One who purchases a real estate with knowledge of a defect of title in his vendor cannot claim that he has acquired title thereto in good faith as against the true owner of the land or of an interest therein; and the same rule must be applied to one who has knowledge of facts which should have put him upon such inquiry and investigation as might be necessary to acquaint him with the defects in the title of his vendor. A purchaser cannot close his eyes to facts which should put a reasonable man upon his guard, and then claim that he acted in good faith under the belief that there was no defect in the title of the vendor. His mere refusal to believe that such a defect exists, or his willful closing of his eyes to the possibility of the existence of a defect in his vendor’s title will not make him an innocent purchaser for value, if it afterwards develops that the title was in fact defective, and it appears that he had such notice of the defect as would have led to its discovery had he acted with that measure of precaution which may reasonably be required of a prudent man in a like situation. x x x "²³

In fine, we hold that respondent Zenaida Tan-Reyes did not act in good faith when she bought the lot and had the sale registered. G.R. No. 142403            March 26, 2003ALEJANDRO GABRIEL and ALFREDO GABRIEL, petitioners, vs.SPOUSES PABLO MABANTA and ESCOLASTICA COLOBONG, DEVELOPMENT BANK OF THE PHILIPPINES (Isabela Branch) and ZENAIDA TAN-REYES, respondents.

PROBLEM NO. 9. On April 13, 1970, defendant spouses Enrique Castro and Herminia R. Castro sold to plaintiff-appellee Manuelito Palileo (private respondent herein), a parcel of unregistered coconut land situated in Candiis, Mansayaw, Mainit, Surigao del Norte. The sale is evidenced by a notarized Deed of Absolute Sale (Exh. "E"). The deed was not registered in the Registry of Property for unregistered lands in the province of Surigao del Norte. Since the execution of the deed of sale, appellee Manuelito Palileo who was then employed at Lianga Surigao del Sur, exercised acts of ownership over the land through his mother Rafaela Palileo, as administratrix or overseer. Appellee has continuously paid the real estate taxes on said land from 1971 until the present (Exhs. "C" to "C-7", inclusive).

On November 29, 1976, a judgment was rendered against defendant Enrique T. Castro, in Civil Case No. 0103145 by the then Court of First Instance of Manila, Branch XIX, to pay herein defendant-appellant Radiowealth Finance Company (petitioner herein), the sum of P22,350.35 with interest thereon at the rate of 16% per annum from November 2, 1975 until fully paid, and the further sum of P2,235.03 as attorney's fees, and to pay the costs. Upon the finality of the judgment, a writ of execution was issued. Pursuant to said writ, defendant provincial Sheriff Marietta E. Eviota, through defendant Deputy Provincial Sheriff Leopoldo Risma, levied upon and finally sold at public auction the subject land that defendant Enrique Castro had sold to appellee Manuelito Palileo on April 13,1970. A certificate of sale was executed by the Provincial Sheriff in favor of defendant- appellant Radiowealth Finance Company, being the only bidder. After the period of redemption has (sic) expired, a deed of final sale was also executed by the same Provincial Sheriff. Both the certificate of sale and the deed of final sale were registered with the Registry of Deeds. ³

Learning of what happened to the land, private respondent Manuelito Palileo filed an action for quieting of title over the same. After a trial on the merits, the court a quo rendered a decision in his favor. On appeal, the decision of the trial court was affirmed.

Question: IS THE DECISION OF THE COURT CORRECT?

We observe that the Court of Appeals resolved the same in favor of private respondent due to the following reason; what the Provincial Sheriff levied upon and sold to petitioner is a parcel of land that does not belong to Enrique Castro, the judgment debtor, hence the execution is contrary to the directive contained in the writ of execution which commanded that the lands and buildings belonging to Enrique Castro be sold to satisfy the execution. ⁵

There is no doubt that had the property in question been a registered land, this case would have been decided in favor of petitioner since it was petitioner that had its claim first recorded in the Registry of Deeds. For, as already mentioned earlier, it is the act of registration that operates to convey and affect registered land. Therefore, a bona fide purchaser of a registered land at an execution sale acquires a good title as against a prior transferee, if such transfer was unrecorded.

However, it must be stressed that this case deals with a parcel of unregistered land and a different set of rules applies. We affirm the decision of the Court of Appeals.

Under Act No. 3344, registration of instruments affecting unregistered lands is "without prejudice to a third party with a better right". The aforequoted phrase has been held by this Court to mean that the mere registration of a sale in one's favor does not give him any right over the land if the vendor was not anymore the owner of the land having previously sold the same to somebody else even if the earlier sale was unrecorded.

The case of Carumba vs. Court of Appeals ⁶ is a case in point. It was held therein that Article 1544 of the Civil Code has no application to land not registered under Act No. 496. Like in the case at bar, Carumba dealt with a double sale of the same unregistered land. The first sale was made by the original owners and was unrecorded while the second was an execution sale that resulted from a complaint for a sum of money filed against the said original owners. Applying Section 35, Rule 39 of the Revised Rules of Court, ⁷ this Court held that Article 1544 of the Civil Code cannot be invoked to benefit the purchaser at the execution sale though the latter was a buyer in good faith and even if this second sale was registered. It was explained that this is because the purchaser of unregistered land at a sheriffs execution sale only steps into the shoes of the judgment debtor, and merely acquires the latter's interest in the property sold as of the time the property was levied upon.

Applying this principle, the Court of Appeals correctly held that the execution sale of the unregistered land in favor of petitioner is of no effect because the land no longer belonged to the judgment debtor as of the time of the said execution sale. G.R. No. 83432 May 20, 1991RADIOWEALTH FINANCE COMPANY, petitioner, vs.MANUELITO S. PALILEO, respondent.

PROBLEM NO. 10. Petitioner spouses instituted against respondents an action for specific performance, recovery of sum of money and damages, docketed as Civil Case No. 8148 of the Regional Trial Court of Dumaguete City, Branch XLII, seeking the reimbursement of the expenses they incurred in connection with the preparation and registration of two public instruments, namely a “Deed of Sale”^[3] and an “Option to Buy.”^[4] In their answer, respondents raised the defense that the transaction covered by the “Deed of Sale” and “Option to Buy,” which appears to be a Deed of Sale with Right of Repurchase, was in truth, in fact, in law, and in legal construction, a mortgage.^[5]

On October 29, 1990, the trial court ruled in favor of petitioners and declared that the transaction between the parties was not an equitable mortgage.  Citing Villarica v. Court of Appeals,^[6] it ratiocinated that neither was the said transaction embodied in the “Deed of Sale” and “Option to Buy” a pacto de retro sale, but a sale giving respondents until August 31, 1983 within which to buy back the seventeen lots subject of the controversy.  The dispositive portion thereof reads:

IN THE LIGHT OF THE FOREGOING, it is the considered opinion of this Court that plaintiffs have proven by preponderance of evidence their case and judgment is therefore rendered in their favor as follows:

1.       Ordering defendants to pay plaintiffs the sum of P171,483.40 representing the total expenses incurred by plaintiffs in the preparation and registration of the Deed of Sale, amount paid to the Bank of Asia and America (IBAA) and capital gains tax with legal rate of interest from the time the same was incurred by plaintiffs up to the time payment is made by defendants; P10,000.00 as attorney’s fees; P15,000.00 moral damages; P10,000.00 expenses of litigation and to pay cost.

2.       The Philippine National Bank, Dumaguete City Branch is directed to release in favor of plaintiffs, the spouses Ronaldo P. Abilla and Gerald A. Dizon all the money deposited with the said bank, representing the rentals of a residential house erected inside in one of the lots in question;

3.       For insufficiency of evidence, defendants’ counterclaim is ordered dismissed.

QUESTIONS: (1) What is a pacto de retro sale? (2) What is an equitable mortgage? (3) May the vendors in a sale judicially declared as a pacto de retro exercise the right of repurchase under Article 1606, third paragraph, of the Civil Code, after they have taken the position that the same was an equitable mortgage?(4) Ultimately, is the decision of the court correct? Explain your answer.

At the outset, it must be stressed that it has been respondents’ consistent claim that the transaction subject hereof was an equitable mortgage and not a pacto de retro sale or a sale with option to buy. Even after the Court of Appeals declared the transaction to be a pacto de retro sale, respondents maintained their view that the transaction was an equitable mortgage. Seeing the chance to turn the decision in their favor, however, respondents abandoned their theory that the transaction was an equitable mortgage and adopted the finding of the Court of Appeals that it was in fact a pacto de retro sale. Respondents now insist that they are entitled to exercise the right to repurchase pursuant to the third paragraph of Article 1606 of the Civil Code, which reads:

However, the vendor may still exercise the right to repurchase within thirty days from the time final judgment was rendered in a civil action on the basis that the contract was a true sale with right to repurchase.

The question now is, can respondents avail of the aforecited provision? Following the theory of the respondents which was sustained by the trial court, the scenario would be that although respondents failed in their effort to prove that the contract was an equitable mortgage, they could nonetheless still repurchase the property within 30 days from the finality of the judgment declaring the contract to be truly a pacto de retro sale. However, under the undisputed facts of the case at bar, this cannot be allowed.

In the parallel case of Vda. de Macoy v. Court of Appeals,¹⁵ the petitioners therein raised the defense that the contract was not a sale with right to repurchase but an equitable mortgage. They further argued as an alternative defense that even assuming the transaction to be a pacto de retro sale, they can nevertheless repurchase the property by virtue of Article 1606, third paragraph of the Civil Code. It was held that the said provision was inapplicable, thus:

The application of the third paragraph of Article 1606 is predicated upon the bona fides of the vendor a retro. It must appear that there was a belief on his part, founded on facts attendant upon the execution of the sale with pacto de retro, honestly and sincerely entertained, that the agreement was in reality a mortgage, one not intended to affect the title to the property ostensibly sold, but merely to give it as security for a loan or other obligation. In that event, if the matter of the real nature of the contract is submitted for judicial resolution, the application of the rule is meet and proper; that the vendor a retro be allowed to repurchase the property sold within 30 days from rendition of final judgment declaring the contract to be a true sale with right to repurchase. Conversely, if it should appear that the parties’ agreement was really one of sale — transferring ownership to the vendee, but accompanied by a reservation to the vendor of the right to repurchase the property — and there are no circumstances that may reasonably be accepted as generating some honest doubt as to the parties' intention, the proviso is inapplicable. The reason is quite obvious. If the rule were otherwise, it would be within the power of every vendor a retro to set at naught a pacto de retro, or resurrect an expired right of repurchase, by simply instituting an action to reform the contract — known to him to be in truth a sale with pacto de retro — into an equitable mortgage. As postulated by the petitioner, "to allow herein private respondents to repurchase the property by applying said paragraph x x x to the case at bar despite the fact that the stipulated redemption period had already long expired when they instituted the present action, would in effect alter or modify the stipulation in the contract as to the definite and specific limitation of the period for repurchase (2 years from date of sale or only until June 25, 1958) thereby not simply increasing but in reality resuscitating the expired right to repurchase x x x and likewise the already terminated and extinguished obligation to resell by herein petitioner." The rule would thus be made a tool to spawn, protect and even reward fraud and bad faith, a situation surely never contemplated or intended by the law.

This Court has already had occasion to rule on the proper interpretation of the provision in question. In Adorable v. Inacala, where the proofs established that there could be no honest doubt as to the parties’ intention, that the transaction was clearly and definitely a sale with pacto de retro, the Court adjudged the vendor a retro not to be entitled to the benefit of the third paragraph of Article 1606.¹⁶

In the case at bar, both the trial court and the Court of Appeals were of the view that the subject transaction was truly a pacto de retro sale; and that none of the circumstances under Article 1602 of the Civil Code exists to warrant a conclusion that the transaction subject of the "Deed of Sale" and "Option to Buy" was an equitable mortgage. The Court of Appeals correctly noted that if respondents really believed that the transaction was indeed an equitable mortgage, as a sign of good faith, they should have, at the very least, consigned with the trial court the amount of P896,000.00, representing their alleged loan, on or before the expiration of the right to repurchase on August 21, 1983.

Clearly, therefore, the declaration of the transaction as a pacto de retro sale will not, under the circumstances, entitle respondents to the right of repurchase set forth under the third paragraph of Article 1606 of the Civil Code.

WHEREFORE, in view of all the foregoing, the instant petition is GRANTED and the January 14, 2001 Order of the Regional Trial Court of Dumaguete City, Branch 41, in Civil Case No. 8148, is REVERSED and SET ASIDE.G.R. No. 146651            January 17, 2002RONALDO P. ABILLA and GERALDA A. DIZON, petitioners,vs.CARLOS ANG GOBONSENG, JR. and THERESITA MIMIE ONG,